Market Summary (7.40 am Friday August 10)

It is almost here folks.

The day US dollar bulls have been waiting for, the break of the range and the move to higher levels. We aren’t there yet but at 95.60 the US Dollar Index has had a strong surge and is sitting right at the top of the recent range. A close above this level to end the week – maybe CPI will be the catalyst – will set the US dollar on its way. Probably toward 100, maybe above.

The corollary of the US dollar move in DXY terms is a big fall in euro of 0.7% to 1.1532, a drop of 0.4% for the pound, and a massive 1.9% fall for the New Zealand dollar as the combination of US dollar strength and overt dovishness from the RBNZ yesterday knocked the Kiwi down to 0.6615 this morning. The Aussie has lost 0.7% in sympathy with these moves and is at 0.7377 but the yen and Canadian dollar have resisted losing just 0.1% and 0.15% respectively with USD/JPY and USD/CAD sitting at 111.06 and 1.3038.

That renewed US dollar strength, this renewed strength, will again roil markets. So, watch this space.

Elsewhere stocks in the US drifted lower overnight. Nothing too big and not too much of a catalyst though the PPI at +0.3% for the core measure is another sign US inflation is rising and the Fed is likely to hike twice this year. At the close the S&P 500 is off 0.14% at 2,853. A move to 2,823 support might be in the offing based on the last three days candles.

The Dow gave back 0.3% to close at 25,509 and the Nasdaq gave up earlier gains to finish down 0.03%, just in the red for a close at 7,467. In Europe the FTSE went ex and fell 0.45% while in Germany the DAX fell 0.43% and in France the CAC was largely unchanged.

Here at home the S&P/ASX 200 and SPI had a run at the range top yesterday. It hasn’t broken yet but SPI traders are still kind of optimistic having added 10 points overnight.

On commodity markets Oil was again lower but with smaller falls after the previous night’s big 3%+ loses. WTI is down 0.33% to $66.71 while Brent is off 0.4% to $71.99. Both contracts were off their lows but seemingly worried about trade and demand. Something the WTO suggested overnight is warranted.

Gold has held up very well in the face of the US dollar move. It’s at $1212 down just 0.1%. Copper is higher too up 0.4% to $2.769 for HGc3.Iron ore is higher as is Bitcoin which bounced nicely from the full round trip support. It’s at $6,495 up 2.86%

US 10's are at 2.93% while the 2's are 2.65%. The curve is at 27.5 points.

On the day its CPI tonight in the US which is a monster number overhanging everything. The market is expecting 0.1% and 2.9% for headline and 0.2% and 2.3% for core. But before that we have plenty to get our teeth into. Japanese GDP for Q2 is out, the RBA releases its quarterly Statement on Monetary Policy, China releases loans data and money supply growth, and the UK has a raft of data out including Q2 GDP, manufacturing, inventory, and industrial production data. And of course Canada releases its jobs data.

Macro Stuff that affects everyone and everything – either today or eventually

International

When doves are hawkish we have to take a little notice. I say that this morning after reading that Chicago Fed President Charles Evans said overnight that the Fed may need to raise rates to “somewhat resttictive” levels by 2020. Evans said “I do think that the underlying inflation expectations that sort of underpin the current inflationary environment are a little bit lower than I would like to see,” but he added that “given the data -- economy being strong -- I think inflation expectations are going to catch up”. The is important because Bloomberg points out that, “as recently as December, Evans dissented against rate increases on the grounds that inflation expectations were too low and may prevent inflation from rising to the Fed’s 2 percent target”. HE’s said one maybe two hikes this year.

And speaking of the inflation outlook here’s a cracking tweet from Glushkin Sheff’s David Rosenberg. He says the 0% monthly outcome was distorted by the government sector and producer prices are actually rising much faster.

Chart

Source: Twitter Screenshot

It seems my intimations and writings that things are not as stable in Chinese politics as we perceive in the west might be on the money. I say that after another article surfaced highlighting the internal battle in China over its response to and approach to the trade war with Washington.

Overnight Reuters reported that the trade war is “causing rifts within China’s Communist Party, with some critics saying that an overly nationalistic Chinese stance may have hardened the U.S. position”. That’s according to 4 sources in the Chinese government. Specifically, Reuters reports the architect behind President Xi’s “China Dream” Wang Huning is in the firing line with a source saying “He’s in trouble for mishandling the propaganda and hyping up China too much”. You can read the article here, but I’d just highlight that like a debutante or adolescent on a bigger stage it seems China is stumbling as it becomes self-conscious. “The overarching view is that China’s current stance has been too hard-line and the leadership has clearly misjudged the situation,” a source told Reuters.

For the markets the question is what does this mean for a deal. Frankly I’m not sure. On the one hand it suggests President Xi may gain credibility for making a deal. But on the other having come this far and suffering a backlash he won’t want to look weak. So, on balance I’d be 60:40 for China digging in.

China’s state media is fighting back however and the vitriol has been ramped up this week. An editorial in the China Daily said yesterday, “he two countries’ trade conflict, which is merely push and shove at the moment, is likely to escalate into more than just a scuffle if the U.S. administration cannot marshal its mobster mentality”. Reuters has more here.

The ECB is worried about the trade war and it’s impact on the economy. “Downside risks to the global economy have intensified amid actions and threats regarding trade tariff increases by the United States and possible retaliation by the affected countries,” it said in a report last night. That’s something the WTO is concerned about as well. Reuters reports that overnight the WTO’s quarterly outlook indicator “a composite of seven forward-looking indices - dipped to 100.3 from the 101.8 predicted in May for the second quarter”. That signalled “an easing of trade growth in the coming months in line with medium-term trends,” the WTO said.

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